The uniqueness of banking business

Photo: Francis Owusu-Acheampong

It is such a pity that modern Ghanaian society has become so polarized that freelance writers and especially those who choose to write on banking related issues have to be extremely careful in what they write, when, and even how to write, lest they are branded as belonging to this or that party, with all the discomforts arising therefrom.

It is as if sympathizing with this or that party is now abominable when, indeed, we have all accepted a multi-party system of political governance. Commenting on purely economic or governance issues has become problematic because objectivity is seen from incredibly biased lenses.

Objectivity has become relative depending on the commentator, and sometimes, laughably, on which part of the country the writer’s name is perceived to come from! But can we not have common grounds to agree rather than bastardizing every issue or initiative simply because it comes from the opposing camp?

In spite of these difficulties, one must still take a stand boldly, censored only by whether the issue is currently before the courts or not. Perhaps, it will help us all to appreciate that not all economists agree on the “best” way to solve a specific economic problem. Although the need to change the status quo is not usually in doubt, it is always the approach that differs.

Theories abound on whether to stimulate the economy through reflationary measures, tame the economy through inflation targeting, how to finance budget deficits or why deficits may be permitted, within what margins, and for what objectives, etc.

Academic arguments may also be propounded on whether economic growth triggers credit expansion or credit expansion rather promotes economic growth. Even the expression “vulnerable segments of the population” and how they should be helped can generate alternative views.

The interesting phenomenon is that, at any one time, the political ideology of the ruling government will determine which approach “best” solves a particular economic objective, within what time frame, and at what cost to the society.

I therefore sincerely long for the day when  parliament will be filled with men and women with altruistic motives to lift the fortunes of this country to the next level, by supporting well-intentioned policies  from the opposing party , or at least, proffering viable alternatives, devoid of pettiness and parochial political submissions.

That democracy is expensive is a well- known cliché but if all we get from this gargantuan expense is pettiness, then let us have some benevolent dictator like Paul Kagame or Lee Kuan Yew and move forward for once.

If you are wondering where this article is taking us, let me assure you that it is simple.  In discussing the banking and financial sector, we must all allow cool rational heads to prevail in view of the sheer peculiarity of banking business through the ages.

We must critically and dispassionately assess the ramification of unfounded allegations and populist assurances. These must be made against sound economic principles that can positively impact the economic health of this country and its membership of the global community.

An analysis of what caused the collapse of Ghanaian banks recently show that misconduct or the absence of value –based judgment were the critical factors, rather than the ignorance of corporate governance rules or the lack of financial expertise among the bank executives. So why not concentrate on agreed metrics for proper conduct in the corporate space and enforce sanctions against those who breach rules rather than jumping to find which party or tribe they belong to?

We must collectively gravitate towards a culture where no individual is mightier than the financial system. To get to that destination requires that financial literacy and governance must become the preserve of those more articulate in the subject rather than the  pedestrian discussions thrown on the airwaves and believed as gospel by a largely illiterate populace.

Understanding financials, the uniqueness of banks, how they operate and why they are stringently regulated are the focal objectives of this write up.

The financials, for instance, give an indication of the strength and sustainability of a bank. Reliance on these financials is however limited by the integrity we can place on those who prepared these financials, and against what assumptions. We have seen apparently strong financials of companies that went bust a few moments after publication of such financials.

A bank’s balance sheet is the representation of the superior or negative actions of especially the men and women at the helm of the bank. These operatives work under the laws of the country and must be seen to be compliant to these laws. Sanctions must be exacted to bring them in line with acceptable norms, irrespective of nationality, tribe or political affiliation.

It is usually difficult for outsiders to evaluate the quality of bank assets and the significance of its liabilities and their composition, hence the usually scant understanding of the bank’s true financial health. For instance, modern banking does not thrive on “brick and mortar” edifices but on competent, honest, highly motivated staff. An array of robust, scalable, impenetrable and adaptable technological systems is a complementary vital resource.

Possessing imposing branches or head offices does not carry any distinctive advantages over competitors. Indeed, a disproportionate mix of non-earning assets over earning assets could be suicidal and pose a regulatory infraction.

The balance sheet does not tell that 40% of the credit portfolio is held by family and friends of the CEO or the board chairman or a significant shareholder or political figure.

A notable peculiarity of banking business is that up to 70 % of all threats to its integrity originates from within the internal domain. This reinforces the people element of operational risk in its risk profile, as with many service organisations.

A bank thrives on the trust and confidence reposed in it by its customers, particularly and that of other stakeholders, including the shareholders and regulatory institutions.

Any break in this trust can spell doom for the individual bank and produce negative systemic consequences on the entire economy.

Corporate governance of banks must therefore be distinguished from that of ordinary companies in view of the peculiar nature of the banking business, its complexity, the uniqueness of banks’ balance sheets, the need for protection of depositors’ funds and the systemic implications that a bank failure can have.

Banks’ balance sheets are peculiar compared to their other corporate peers. Liquidity is the lifeblood of a bank as opposed to its fixed asset infrastructure.

Another distinguishing feature of banks is that they serve several conflicting interests – from equity or debt holders to borrowers or depositors. Good governance, including social and environmental risk management, is therefore required to balance these competing interests.

The banks’ financials do not reflect the difficulties involved in recovering facilities, nor the dilemma the recovery team encounters in demanding repayments from persons who may have deployed these funds in their inordinate desire to acquire most of the plush buildings in Cantonments, Airport Residential Area and Roman Ridge in Accra.

Neither does the bank’s balance sheet show that depositors’ funds and Extended Liquidity Assistance have been siphoned by directors to acquire toxic or not too profitable assets in and outside the country. Only a subsequent forensic audit can reveal such improprieties.

The financials will not also tell you that other strong banks’ Asset and Liability Committees (ALCOs) have respectively decided to withhold further short term facilities to some ailing bank. Effectively, therefore, the ailing bank will come to a point when it is unable to meet routine withdrawals of depositors’ funds.

In an age of virtual communication capabilities, no amount of public relations expertise can diffuse a run on the bank which may lead to its eventual collapse.

To put matters into proper perspective, we can relate to the National Investment Bank Limited’s  $68 million court case some few years back. This involved the issuance of some promissory notes to a counter-party. The transaction eventually went awry and had to be settled in court.  At both the High Court and the Appeals Court, the bank lost in the rulings. The case proceeded to the Supreme Court where the learned judges overturned the earlier decisions that went in favour of the complainant, thus providentially saving the bank from imminent collapse.

All this while, the contingent liability had found just a little space in the bank’s financials as a “common disclosure” as required by accounting standards.

Just imagine if the bank had lost the case in the Supreme Court. It all supposedly started with the alleged conduct or misconduct of a CEO/Director and whether or not the right internal corporate governance processes were adhered to in the issuance and delivery of those instruments.  Sixty- eight million dollars in those days of what started as “ a mere contingent liability” could easily have wiped off the entire balance sheet of the then National Investment Bank Limited.

What the balance sheet hides can also be a team of avaricious directors intent on owning a disproportionate share of communal wealth. It all boils down to the conduct or misconduct of the stewards (the board, management and staff), to determine the growth or decline of the bank. Thus, the ethical disposition of these agents and how this reflects in their decision making becomes paramount.

Strategies by themselves do not generate growth. Growth is generated by honest, competent operatives with altruistic motives in the discharge of their functions.

Unlike customer dissatisfaction with a particular brand of milk or some other tangible product, which may force customers to shun just that specific brand, they may continue to patronize other competing brands of milk or such other product.

However, mistrust of stakeholders in a bank creates contagion effects on even other strong banks and the entire financial system beyond the fortunes of the bank reeling under the reputational crises. The 2006-2008 American financial crises were a clear manifestation of this plague which affected even innocent pensioners in Norway, Iceland and other domains.

These observations, therefore, make it imperative that in discussing matters concerning banks, we must all be very circumspect and tone down any political connotations for the sake of the economy. The state will certainly outlive any political party. When people with little insights into how banks operate consciously pollute minds in the media under political colouration therefore, my heart grieves tremendously.

It is true that significant infractions that led to the collapse of some Ghanaian banks could have been handled differently.  It is so easy to make that conjecture, when you are not the governor of the central bank carrying the onerous responsibly to safeguard the sanctity of the local financial system and our responsibilities towards the international financial system.

We must not, however, forget that some of those infractions if they had been permitted to continue, could have brought about the eventual collapse of those banks, irrespective of how long the central bank “allowed the wounds to fester”. Perhaps the effects could have been even more devastating than what we are currently experiencing.

We must not also gloss over the risk the country faced with international competitors and donors whether the collapsed banks went into voluntary liquidation or their licences were revoked by the Central Bank.

The governor has an arduous task of balancing the interests of bank boards, shareholders, investors, the general public and the ruling government. The latter usually carries a huge burden of how to fulfill the numerous and often conflicting election promises made to a highly expectant electorate during an election year.

To compound the governor’s dilemma, he also has the responsibility of ensuring compliance to IMF conditionalities which are supposedly pro- fiscal and monetary discipline but not always supportive of development in a third world context. And COVID-19 comes in to wreak even more havoc and throws up budgetary imbalances and monetary policy nightmares.

The governor still has to manage the national debt and report on this even if governments, past and present have accepted the crunching IMF conditionalities but have not always used the borrowing for their intended purposes to generate incremental wealth.

It is no mean task playing the role of a catalyst for stable economic growth and development while complementing the incumbent government’s goals, some of which may not necessarily be congruent to macro-economic stability.

An election year that is compounded by the COVID-19 pandemic makes it really daunting for any governor in an emerging market economy. Budgetary imbalances being experienced even in Europe and the US cannot escape any fair-minded commentator.

Truth be told, some of the revelations during the audit of the collapsed Ghanaian banks revealed improprieties that could hardly be tolerated in any jurisdiction. That some external auditors were found culpable of professional misconduct speaks volumes of the decay the banks involved had descended into.

The blame game and pronouncements regarding possible review of the current state must therefore take cognizance of the wider country risk analysis into the future and how these could affect our investment drive into or out of the country.

Let us therefore resolve to allow the Courts to determine the current cases for the sake of justice and our global competitiveness. Certainly, there are more than enough issues to   fill political manifestoes for the electorate to make informed decisions, come December 2020.  Ultimately the peace and prosperity of Ghana should be paramount as covid 19 has sufficiently demonstrated that there is no place like home.

The writer is a Fellow of the Chartered Institute of Bankers and an adjunct lecturer at the National Banking College, and the Chartered Institute of Bankers, a farmer and the author of “Risk Management in Banking” textbook.

Email; [email protected]  Tel. 0244 324181 / /0576436414

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